Learning Outcomes
After studying this article, you will be able to explain the general rule against recovery for pure economic loss in negligence, identify the Hedley Byrne exception for negligent misstatements, and apply the requirements of assumption of responsibility and reasonable reliance. You will also be able to distinguish between actionable and non-actionable claims for pure economic loss and recognise the limits of the Hedley Byrne principle for SQE1 purposes.
SQE1 Syllabus
For SQE1, you are required to understand the exceptions to the general rule against recovery for pure economic loss in negligence, with particular focus on the Hedley Byrne principle. In your revision, pay close attention to:
- the general rule that pure economic loss is not recoverable in negligence
- the requirements for a claim under the Hedley Byrne exception (negligent misstatement)
- the concepts of assumption of responsibility and reasonable reliance
- the circumstances in which a duty of care for pure economic loss may arise
- the limits of the Hedley Byrne principle and the relevance of disclaimers
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What are the two key requirements for a successful claim for pure economic loss under the Hedley Byrne exception?
- True or false? A casual remark made at a party about the value of shares can give rise to a duty of care under the Hedley Byrne principle.
- Which of the following best describes the effect of a clear disclaimer in a professional report?
a) It always prevents liability for negligent misstatement.
b) It may prevent liability, but only if it is reasonable and brought to the claimant’s attention.
c) It never prevents liability. - In what circumstances will a court find that a defendant has assumed responsibility for a claimant’s economic loss?
Introduction
The general rule in English tort law is that pure economic loss—financial loss not resulting from physical injury or property damage—is not recoverable in negligence. However, there is a key exception for negligent misstatements, established in the case of Hedley Byrne v Heller. This article explains the Hedley Byrne principle, the requirements for a claim, and the limits of this exception for SQE1.
The General Rule: No Recovery for Pure Economic Loss
In negligence, claimants cannot usually recover for pure economic loss. This rule exists to prevent unlimited liability for defendants and to maintain a clear boundary between contract and tort.
Key Term: pure economic loss
Financial loss suffered by a claimant that does not result from physical injury to a person or property, but arises independently.
The Hedley Byrne Exception: Negligent Misstatements
The courts have recognised an exception to the general rule where a defendant makes a negligent misstatement that causes pure economic loss to a claimant. This is known as the Hedley Byrne principle.
Key Term: negligent misstatement
An inaccurate statement made carelessly by one party, which causes another party to suffer financial loss.Key Term: Hedley Byrne principle
The legal rule that a duty of care for pure economic loss may arise where a defendant assumes responsibility for a statement and the claimant reasonably relies on it.
Requirements for a Claim under Hedley Byrne
To succeed in a claim for pure economic loss under the Hedley Byrne principle, the claimant must show:
- Assumption of responsibility by the defendant for the accuracy of the statement or advice.
- Reasonable reliance by the claimant on that statement or advice.
Key Term: assumption of responsibility
A situation where the defendant, expressly or impliedly, accepts responsibility for the accuracy of information or advice given to the claimant.Key Term: reasonable reliance
The claimant’s reliance on the defendant’s statement or advice is justified in the circumstances, and the defendant knew or ought to have known that reliance would occur.
The Special Relationship
A duty of care for negligent misstatement arises only where there is a "special relationship" between the parties. This relationship is established by the defendant’s assumption of responsibility and the claimant’s reasonable reliance.
Worked Example 1.1
A financial advisor tells a client that a particular investment is low risk and suitable for their needs. The client invests based on this advice and suffers a substantial loss when the investment fails. Can the client claim for pure economic loss?
Answer: Yes. The advisor assumed responsibility for the advice, and the client reasonably relied on it. This creates a special relationship under the Hedley Byrne principle.
Application of the Caparo Test
In addition to the Hedley Byrne requirements, the courts may also consider the three-stage Caparo test for duty of care in novel situations:
- Was the loss to the claimant reasonably foreseeable?
- Was there sufficient proximity between the parties?
- Is it fair, just, and reasonable to impose a duty?
However, for negligent misstatements, the focus remains on assumption of responsibility and reasonable reliance.
Limits of the Hedley Byrne Principle
The courts are cautious about extending liability for pure economic loss. The following limits apply:
- Social or informal advice: Casual statements made in a social context do not usually give rise to liability.
- Disclaimers: A clear and reasonable disclaimer may prevent a duty of care from arising.
- Sophisticated claimants: If the claimant is an expert or has access to independent advice, reliance may not be reasonable.
Worked Example 1.2
A surveyor prepares a report for a house buyer, but includes a prominent disclaimer stating that the report is for information only and no responsibility is accepted for its accuracy. The buyer relies on the report and suffers loss due to a defect not mentioned. Is the surveyor liable?
Answer: Probably not. The disclaimer was clear and reasonable, so the surveyor did not assume responsibility for the accuracy of the report.
Exam Warning
The Hedley Byrne principle applies only to negligent statements (or, in some cases, negligent provision of professional services). It does not allow recovery for pure economic loss caused by negligent acts, unless there is physical damage or injury.
Revision Tip
For SQE1, focus on the two key elements: assumption of responsibility and reasonable reliance. Be able to identify when a special relationship exists and when a disclaimer may defeat a claim.
Summary
- The general rule is that pure economic loss is not recoverable in negligence.
- The Hedley Byrne principle creates an exception for negligent misstatements where there is a special relationship.
- The claimant must show assumption of responsibility by the defendant and reasonable reliance on the statement.
- Disclaimers and the context of the advice may limit or prevent liability.
Key Point Checklist
This article has covered the following key knowledge points:
- The general rule against recovery for pure economic loss in negligence.
- The Hedley Byrne exception for negligent misstatements.
- The requirements of assumption of responsibility and reasonable reliance.
- The need for a special relationship between the parties.
- The effect of disclaimers and the limits of the Hedley Byrne principle.
Key Terms and Concepts
- pure economic loss
- negligent misstatement
- Hedley Byrne principle
- assumption of responsibility
- reasonable reliance
